The Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2023 has introduced significant changes to the definition of employment and the regulation of independent contractor arrangements in Australia. These amendments, set to take effect from 26 August 2024 or earlier as determined by the Australian Government, mark a return to a multi-factorial approach in determining employment status.
New Definition of Employment
The Fair Work Act 2009 (Cth) now includes a new definition of “employment” that effectively reverses the 2022 High Court decisions in Construction, Forestry, Maritime, and Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2. These decisions had prioritised the written contract as the primary determinant of the employment relationship.
Under the new definition in section 15AA of the Fair Work Act, “employment” is defined by the real substance, practical reality and true nature of the relationship between an individual who may be an employee and a person who may be an employer. This assessment takes into account the totality of the relationship, including both the contract governing the relationship and how it is performed in practice.
Factors that may be considered include:
- The nature of the work conducted
- Autonomy provided
- Payment of remuneration and tax arrangements
- Control over work methods
- Setting of work hours
- Allocation of financial risk
- Provision of work equipment
This approach means that regardless of what a written contract states, if the relationship operates as one of employment in practice, it will be considered an employment relationship. As a judge stated, “one cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck.”
This shift introduces potential risks for businesses that incorrectly classify their workers. Misclassification may lead to liability for numerous employment entitlements, including annual leave, personal leave, award rates of pay, penalties, and loadings. It may also give rise to claims of sham contracting and resultant penalty orders.
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Opt-Out Regime for High-Income Contractors
To provide some certainty, the legislation has already introduced an “opt-out” regime for individuals earning above the High Income Contractor Threshold. From 27 February 2024, a principal may notify an eligible independent contractor of their right to opt out of the new employment definition if they believe the individual earns above the high-income threshold, and would be regarded as an employee under the new definition.
Within 21 days of receiving notice or of their own volition, an independent contractor may issue an “opt-out” notice. This preserves their status as an independent contractor from 26 August 2024 onwards, regardless of whether the relationship falls within the scope of the new definition. Contractors can only issue one opt-out notice during the relationship and must include a statement confirming their earnings exceed the high-income threshold.
Contractors who have opted out may later issue a “revocation notice” if they wish to be subject to the new employment definition. However, this can only be done once during the relationship.
Sham Contracting
The amendments also strengthen provisions against sham contracting. Employers must not represent a contract of employment as a contract for services. The penalties for sham contracting have become extremely onerous, and it is now harder for employers to defend misrepresenting employment as an independent contracting arrangement.
Effective from 27 February 2024, employers who misrepresent employment as an independent contracting arrangement have had to prove they did so with a reasonable belief it was accurate. When determining the matter, courts will consider whether an employer’s belief is reasonable by having regard to the size and nature of the business and any other relevant matters.
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Hire casual employees in any industry. This Employment Agreement (Casual) is essential when hiring new employees for your business.
New Unfair Contracts Regime
From 26 August 2024, the Fair Work Commission (FWC) will have expanded powers to adjudicate on matters relating to unfair terms in services contracts for independent contractors earning below the High Income Contractor Threshold. This provides a more accessible and less costly avenue for contractors to pursue claims compared to the current process through the Federal Court under the Independent Contractors Act 2006.
In determining whether contract terms are fair, the FWC may consider a range of factors, including the relative bargaining power of the parties and how this is reflected in the contract, and whether, considering total remuneration alongside both parties’ obligations, the contractor is working under reasonable conditions.
If the FWC finds a term unfair, it may issue orders to set aside, amend, or vary all or part of the services contract.
Key Takeaways for Businesses
To navigate these changes effectively, businesses should:
- Conduct a thorough review of current contractor engagements to ensure proper classification. Evaluate all factual considerations when classifying someone, considering the new legislative definition.
- Ensure comprehensive written agreements for all contractor arrangements that accurately reflect the nature of the work and both parties’ obligations, including any contracts that you use for new contractors.
- Avoid any arrangements that might be considered unfair under the new legislation.
These amendments introduce a new level of complexity and potential risk for businesses engaging independent contractors. It’s crucial for organisations to reassess their practices and seek specialist advice to ensure compliance with the new laws and mitigate the risk of misclassification and potential claims.
As these changes reshape the landscape of work arrangements in Australia, both businesses and workers must stay informed and adapt to the new regulatory environment. The shift towards a more holistic assessment of working relationships aims to provide greater protection for workers while introducing new considerations for businesses in structuring their workforce.
Lawpath provides a range of employment documents to ensure that you have the right documentation that complies with legislation and reflects the nature of the employment relationship. These include:
- Full Time Employment Agreement for permanent employees.
- Employment Agreement (Casual) for casual employees.
- Contractor Agreement (Individual) for independent contractors.
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